patentology

17 June 2012

It is actually not that easy to imagine a world without patents. At least, not if you really try. If you are the kind of person who is generally opposed to patents, or who thinks that the patent system is fundamentally ‘broken’, you might suppose that you can easily imagine a world without patents. And you might imagine it as some kind of utopia: no software patents, no ‘business method’ patents, no gene patents, no patent trolls, no ‘FRAND abuse’, no Apple v Samsung v Oracle v Google v Motorola v Microsoft v HTC v …

But this is not really imagining a world without patents. This is just a world without some of the messier consequences of patents. If you really want to imagine a world without patents – or, indeed, any other form of intellectual property rights – you have to try to imagine all of the other consequences of this hypothetical scenario.

First you need to ask yourself, what kind of scenario are you actually trying to imagine? Do you want to visualise what the world might have been like if there never were patents? Or do you want to imagine what would happen if all patents were to be abolished overnight? The second scenario is more practical, in the sense that it is at least theoretically possible (although astronomically unlikely). However, the first is more interesting, in the sense that it encourages one to imagine completely different models for innovation and technological advancement which may have developed in the absence of patents.Either way, however, the hypothetical exercise is potentially instructive, because it requires consideration of the possible adverse consequences of there being no patent system. As matters stand, there is far too much focus on the adverse aspects of the system we actually have, which leads to an unfair bias in much so-called analysis and commentary.

A Google search confirms that there are thousands of articles, comments and blog posts published online about our ‘broken’ patent system. This proves only that it is a popular view among a certain sector of society (i.e. those who publish articles, comments and blog posts online). It does not establish the truth of the proposition that the patent system is broken. The fact is that it is not broken. It is not perfect – and it never will be – but it is not ‘broken’.

This will be the first in a short series of posts looking at the current state of the patent system, the purpose it serves, the role it plays in innovation, business and politics, what works works well, what works less well, and what might be done in practice to curb some of the worst abuses of the system.

IF THERE HAD NEVER BEEN PATENTS…

What if patents had never been?

For as long as there has been commerce, there have been monopolies. Some have been natural monopolies (i.e. where the cost of having multiple participants in a market exceeds the potential benefits of competition), some have been ‘sanctioned’ monopolies (e.g. where the state grants or permits a monopoly in order to achieve policy objectives which the free market is not expected to deliver), and some have been what we would now widely regard as ‘illegal’ monopolies (e.g. achieved through the abuse of market power, or by collusion between nominal competitors).

Patents are sanctioned monopolies, typically intended to achieve policy objectives such as rewarding innovative activity, or ‘promoting progress in the useful arts’. Formal systems for granting patents for inventions arose from informal – and generally corrupt – mechanisms whereby heads of state granted monopoly privileges as they saw fit. The Statute of Venice of 1474 formally recognised that there there should be some objective basis – and overall benefit to the state – for the grant of a monopoly, and that this should be limited in scope and in time. The British Statute of Monopolies of 1623 withdrew the monarch’s power to grant monopolies, making them all illegal except for those which satisfied the criteria of what we would now recognise as ‘inventions’, for which privileges of limited scope and duration could be granted.

And so the modern patent system was born.

Of course, it did not have to be this way. The market could have been given free rein to operate without the restraint imposed by patents. There might have been no mechanism developed to prevent any new innovation made by one participant in a market from being freely copied by others. No doubt many people would still have innovated – for some it is just ‘in the blood’ – but it is hard to imagine that they would have profited greatly, with competitors invariably able to replicate any successful new idea with impunity.

It is impossible to imagine how the world of the 21st century might be different if there had never been patents, but it seems undeniable that it would be different. Would there be venture capitalists? If so, how would they make investment decisions? How would any investor justify risking their money on a business based on an idea that could be quickly and easily copied the moment it proved successful?

One thing that seems highly unlikely is that we would have privately-held pharmaceutical companies in the absence of patents. Of course, the consumer (or the taxpayer) ends up paying for drug development through the cost of patented drugs. But the patent system enables the drug companies to assume the risk of discovery and development up-front, in a competitive environment, secure in the knowledge that a successful outcome will provide a sufficient return on investment during the patent term.

What would the drug-development model look like without patents? It could be state-sponsored, at taxpayer expense. Or the industry could be highly-regulated to avoid duplication of discovery and development, creating sanctioned monopolistic companies rather than monopolies on individual drugs once developed. Neither of these alternatives seems especially attractive.

If we could start over, with the benefit of hindsight, it is entirely possible that we would choose once again to create a patent system so that responsibility for innovation could be vested in private enterprise within a broadly competitive market. Despite what you might read, patent monopolies remain an exception to free competition, rather than the rule.

IF PATENTS WERE ABOLISHED…

The abolition of the patent system would be disastrous in the short to medium term. Overnight, it would deprive entire industries – such as pharmaceuticals – of their business models, and it would destroy the value-proposition of numerous small businesses and start-ups. In a post-industrial ‘knowledge economy’, the only thing that many companies have is their intellectual property, which only creates bankable value in the company to the extent that it can be protected from replication by competitors.

In the longer term, no doubt new models would emerge. But not before tremendous upheavals bringing pain and hardship to many businesses – and their employees – which benefit from the existing system. And with large incumbent companies being technically and financially able to replicate and absorb any innovative technologies as they emerge, the end effect could well be fewer players in every industry, i.e. less competition and, ultimately, less innovation.

On the positive side, there would be no more patent trolls, no more high-profile global battles between huge corporations consuming the resources of our national courts, and no more disputes over fair and reasonable licensing terms for standards-essential patents, among other shortcomings of the existing system. But in the bigger scheme of things, these are more minor and temporary irritations than major flaws. And, in any event, the solution to such problems is not the complete abolition of the patent system.

CONCLUSION

It is not enough to criticise the patent system, or to argue for its total or partial abolition. While this is easy to do – especially when there are real abuses of the system occurring – it is less easy to unwind centuries of development of a system which continues to support a variety of forms of innovative commercial development.

In some cases, patent monopolies provide a private sector alternative to other forms of state sanctioned monopoly, or government regulation. In other cases, they simply provide a mechanism to lock-in the value inherent in innovation, so that it becomes a bankable commodity.

Any genuine plan to reduce or eliminate the role of patents in modern societies will need to address these issues. Assuming that they are unnecessary in practice simply because it can be argued that they are unnecessary in principle does not establish a sufficient case for radical reform.

Next time– the critics of the patent system

The next article in this series will look at the basis for current criticism of the patent system, and propose that there are few broad categories of critics, all of which need to be considered in view of their particular vested interests.

Very interesting article Mark, and I think you have nailed down the real basis of the opposition to patents in general. I would never have gone as far as I have in developing new things, without some possibility of reaping some real financial rewards for a few brief years.

If I succeed I might be able to see US$80,000 per year by licensing, and if I fail, all of my investment will be gone without a trace, unless I boot-strap a business to make and sell them myself, for even larger potential profits per smaller amounts of units sold. Financing, as you clearly point out. The US economy is so goofed up these days that financing *new* things has become very difficult lately. Especially if you don't have a granted patent in hand.

The reason the patent system is so open to criticism is because it does not have strong philosophical foundations; the patent system is based more on faith and history than evidence or analysis. Ultimately proponents of the patent system should be able to prove the patent system is a more efficient method of providing economic benefits than any other system of innovation. And rather than considering this as an ‘all or nothing’ proposition, the analysis should be nuanced about all aspects of the patent system.

In my opinion, the fundamental reason for a patent system is an incentive for the dissemination of knowledge. Without this incentive, companies would tend to keep technical knowledge secret. Secrecy about technical knowledge is detrimental for two reasons: a) knowledge can be lost, e.g. if the inventor or company dies without disclosing their invention; and b) effort is wasted by numerous companies duplicating the discovery of the invention. The fact that the patent system provides ownership (and arguably more favourable investment conditions) is secondary to the patent system’s primary purpose.

Currently all the heat in the debate is focused on the areas of patentability and threshold of inventiveness. Although these are important areas of consideration, I think by far the most important aspect of patents is being overlooked: the term of patents. 20 years is completely arbitrary and a relic of a bygone era. I believe a much shorter term of patent would solve most of the problems the patent system is currently experiencing while preserving its benefits.

Roald Dahl's Charlie and the Chocolate Factory depicts a patent-free world, where Willy Wonka's inventions are ripped off by his competitors after some industrial espionage. Mr Wonka's response is to fire all his workers and use Oompa Loompas instead.

I have the impression that Wonka was simply a sociopathic control freak who would choose obsessive secrecy and an army of captive minority workers over the patent system, regardless!

More seriously, there is not really any difference between Wonka choosing to follow the trade secret route with his candy recipes, and Coca Cola or KFC using the same approach. If you take appropriate steps to maintain confidentiality (as Wonka undoubtedly did) you may potentially enjoy a monopoly far in excess of the 20 years offered by a patent.

It is surprising that the purpose of an economic tool as pervasive and entrenched as the patent system is so unclear and underscores the need for sturdier philosophical foundations. If the sole purpose of patents was to encourage investment, then I imagine the patent system might look much more like the trade mark system: indefinite term of monopoly, and prior art only considered within the jurisdiction rather than worldwide. Although there may be benefits to such a hypothetical system (e.g. more stability in investment), there would surely be significant problems (e.g. rent-seeking behaviour). I think patents are a useful tool for encouraging investment, but we should tailor the type of investment. Specifically, patents should be used to reinforce the ‘first-mover’ advantage, i.e. if you are the first to invent something and you start to commercialise it you should be given an advantage over the competitors (perhaps a few years head start). The special case of pharmaceuticals could be dealt with by adjusting the extension of term provisions. So, for example, if the term of patents were reduced to 4 years, the extension of term given to compensate for fulfilling regulatory requirements could be increased to 10 years. “You suggest that 'proponents of the patent system should be able to prove the patent system is a more efficient method of providing economic benefits than any other system of innovation'. In an ideal world, this might be true. In practice, I would be interested to know if you have any suggestions as to how it might be done.”There is probably a Noble Prize for an economist to answer this question persuasively. The framework for answering the question is relatively simple: build a model of the innovation system, fiddle with the variables (e.g. term of patent) and alternatives (e.g. prizes vs patents), find the most efficient solution. I reject the notion that it is simply too hard so we shouldn’t bother trying.

It is surprising that the purpose of an economic tool as pervasive and entrenched as the patent system is so unclear and underscores the need for sturdier philosophical foundations. If the sole purpose of patents was to encourage investment, then I imagine the patent system might look much more like the trade mark system: indefinite term of monopoly, and prior art only considered within the jurisdiction rather than worldwide. Although there may be benefits to such a hypothetical system (e.g. more stability in investment), there would surely be significant problems (e.g. rent-seeking behaviour). I think patents are a useful tool for encouraging investment, but we should tailor the type of investment. Specifically, patents should be used to reinforce the ‘first-mover’ advantage, i.e. if you are the first to invent something and you start to commercialise it you should be given an advantage over the competitors (perhaps a few years head start). The special case of pharmaceuticals could be dealt with by adjusting the extension of term provisions. So, for example, if the term of patents were reduced to 4 years, the extension of term given to compensate for fulfilling regulatory requirements could be increased to 10 years. “You suggest that 'proponents of the patent system should be able to prove the patent system is a more efficient method of providing economic benefits than any other system of innovation'. In an ideal world, this might be true. In practice, I would be interested to know if you have any suggestions as to how it might be done.” There is probably a Noble Prize for an economist to answer this question persuasively. The framework for answering the question is relatively simple: build a model of the innovation system, fiddle with the variables (e.g. term of patent) and alternatives (e.g. prizes vs patents), find the most efficient solution. I reject the notion that it is simply too hard so we shouldn’t bother trying.

Sturdier foundations? You sound a bit like our very overbearing and litiginous large corporations here in North America. They sabotaged US patent law to suit their needs by spending hundreds of millions to make small entities just go away, and the US Congress actually Bought their whole song and dance and pony show. Do what you like, but unless you are an open-source *innovator* you might very well be just shooting yourself in the foot over the long run.

I agree that difficult, but important, enterprises should not simply be consigned to the 'too hard' basket.However, if history teaches us anything it is that social and economic modelling has so far been an abject failure. This would not be a problem if the models could be adequately tested before they are applied in the 'real world'. But this is not practical, because the object is to use the models to adjust policy settings, and until they are applied there is no way to know whether or not the underlying assumptions and simplifications are valid.By the time anyone acknowledges that the economists got it wrong, the entire global economy has been plunged into a financial crisis from which it will take years to recover.However, I am hearing that IP Australia is planning on following the trend in other national patent offices of getting an economist on staff to provide analysis and input into some of these areas of policy-making. This is either a little scary, or an encouraging development, depending on your view of economists!

“…if history teaches us anything it is that social and economic modelling has so far been an abject failure. By the time anyone acknowledges that the economists got it wrong, the entire global economy has been plunged into a financial crisis from which it will take years to recover.” The financial crisis is due to fraud, stupidity and regulator complacency, (hmm, perhaps there are a few parallels with the current patent ‘crisis’). Although economic modelling was one way of legitimising these causes, it was not in itself the cause of the crisis. Economic modelling is an effective tool when used in conjunction with good judgement. I don’t have the skills to determine whether the patent system should be analysed with economic modelling or some other method, but to focus on the flawed uses of economic modelling misses the point entirely. What is important in addressing the question of an optimal innovation system is that impartial, critical thinking skills are used.

One of the possible outcomes from a world without patents is a world with more secrets. There is a fascinating episode from history which is on point: Obstetrics Forceps were kept secret for many years by the Chamberlen family. (Arch Dis Child Fetal Neonatal Ed 1999;81:F232-F234 doi:10.1136/fn.81.3.F232 ). Many lives might have been saved had the forceps not been kept confidential for as long as they were, a period much longer than the duration of a patent.

Funny you should mention this. I had not heard the story until very recently, when it came up in another context. Interestingly, the period during which the Chamberlen family kept the secret spanned the birth of the British patent system (in 1623). While the absence of a patent system at the time of invention was probably only one factor in the Chamberlens' decision to keep their forceps secret, this is certainly a good illustration of the wider benefits in providing an economic incentive for disclosure.http://en.wikipedia.org/wiki/Peter_Chamberlen

I think the 'inevitability of invention' is an important aspect to consider in philosphical underpinnings of the patent system. Although there are a handful of examples such as the Chamberlen forceps (the 'startlite' plastic http://en.wikipedia.org/wiki/Starlite is another more recent example), these are probably the exeption rather than the rule. 'Multiple discoveries' http://en.wikipedia.org/wiki/Multiple_discovery provides a counterpoint to the more traditional 'heroic inventor' trope http://en.wikipedia.org/wiki/Heroic_theory_of_invention_and_scientific_development

Thanks for the link to the article; I’ll read it when I have time.You said:

“Personally, I do not find 'inevitability of invention' to be a very persuasive argument against the patent system.”

I agree it is not (on its own) a persuasive argument against the patent system, but it can be a useful ‘prism’ through which to view questions such as term of patent.You said:“Almost anything is inevitable, given enough time and the right circumstances.”

I completely agree, but we can use (rather than ignore) this realisation in developing an efficient patent system. The purpose of patents is to expedite the inventions and disclosure of these inventions. Inventors should be rewarded commensurate with how much they have expedited the invention and disclosure. This is an avenue worthy of research to determine a fair and effective term of patent.

I’ll leave discussion about ‘threshold of inventiveness’ for another time.

I also have a problem with the equation of 'the system is not working perfectly' with 'let's aboliosh the system'. But there are people who hold this opinion, which is why I wrote this article.

Just to be clear, this is not necessarily restricted to the very extreme view that the entire patent system should be abolished. The idea that 'the system is not working perfectly in respect of technology X' equals 'we should abolish patents in respect of technology X' is equally flawed. For the particular case in which X is 'software', this is exactly what many vocal individuals and groups advocate.

Roald Dahl's Charlie and the Chocolate Factory depicts a patent-free world, where Willy Wonka's inventions are ripped off by his competitors after some industrial espionage. Mr Wonka's response is to fire all his workers and use Oompa Loompas instead. By the way plagiarism checker for checking plagiarism in your comments